Law Commission consults on draft Bill to modernize the rules on ownership of goods under sales contracts
What are the proposed changes to rules on transfer of ownership?
The key takeaway
The Law Commission’s proposed changes are likely to improve consumers’ odds of owning goods bought online in the event of retailer insolvency, even before they have left the retailer’s possession.
The current rules on transfer of ownership are woefully outdated, remaining substantially unchanged from the Sale of Goods Act 1893 (although they have been transposed into the Sale of Goods Act 1979). The gist of these rules in practice is that, under a sales contract, transfer of ownership only takes place once the goods are delivered to the consumer. However, the rules have been criticised for being unclear, overly complex, containing archaic language, and not fitting with consumers’ reasonable expectations of the point at which they own the goods they purchase. Above all, the rules obviously fail to account for the nuances of online shopping.
In 2016 the Law Commission published a report recommending an update to rules on transfer of ownership. Among other small problems, the basic issue it sought to fix is as follows:
- a customer purchases goods online;
- before the goods leave the retailer’s possession, the retailer becomes insolvent;
- due to the current rules on transfer of ownership, the insolvency practitioner must resolve that the goods remain property on insolvency;
- the customer is left as an unsecured creditor with little chance of claiming the goods they paid for.
The 2016 report laid out suggestions for criteria which, if met, would enable a transfer to the customer before they received the goods.
The Law Commission has been asked by the Department for Business, Energy and Industrial Strategy to prepare draft legislation based on their 2016 report. After drafting the Bill, they recently consulted on a series of aspects of the Bill in a consultation period which ended on 31 October 2020, including:
- whether the draft Bill successfully implemented the recommendations of the 2016 report
- a call for evidence and views about sales contract formation (more on this below), and
- a request for information about the expected impact of the draft Bill in practice.
The draft Bill is intended to bring rules on transfer of ownership into the 21st century by clarifying language, simplifying the law, and taking into account new practices in retail such as online shopping.
The new rules
The Bill makes a distinction between goods which are identified and agreed on at the time the sales contract is made (for example, where the item is selected in a physical store, or it is an online purchase of a unique item), and goods which aren’t identified and agreed on (for example, a standard online purchase, where the customer purchases an item according to a generic description).
Where goods are identified and agreed upon when the contract is made, ownership transfers at the point the contract is made. This is true even if the goods stay with the retailer, for example if they need to make alterations.
Where goods aren’t identified and agreed upon when the contract is made, ownership will transfer where any of the following happen:
- goods are labelled with the consumer’s name in a way that is intended by the trader to be permanent;
- goods are set aside for the consumer in a way that is intended by the trader to be permanent;
- alteration of the goods to a specification agreed between the trader and the consumer is completed;
- consumer is told by the trader that goods bearing a unique identifier will be used to fulfil the contract (especially for high-value goods, such as smartphones);
- manufacture is completed, if the goods are to be manufactured for the consumer to a specification agreed between the trader and the consumer;
- ·on examining the goods, the consumer agrees that they are to be used to fulfil the contract;
- goods are delivered to a carrier for delivery to the consumer;
- goods are delivered to the consumer; and/or
- goods that are to be used to fulfil the contract are identified by the trader in some other way, and the trader intends the identification to be permanent (this is a catch-all clause for analogous cases).
The Law Commission has noted that many of these criteria are heavily dependent on the practices of each individual retailer, and that in the case of insolvency, it will be up to the insolvency practitioner to determine if ownership of goods has transferred to the customer.
A particularly critical aspect of the Bill being consulted on relates to the formation of the contract. These proposed amendments all function on the basis of a sales contract existing from the point of payment onwards, but the Law Commission has noted that sometimes retailers will include terms and conditions which prevent formation of a sales contract until dispatch of the goods, rendering the proposed amendments ineffective. The Law Commission is therefore consulting closely on how widespread this practice is, and how it might be worked around. It naturally remains to be seen how the results of that consultation will affect the wording of the draft Bill.
Why is it important?
COVID has turbocharged trends in both online shopping and retailer insolvency. This draft Bill promises to alleviate one of the problems raised by the meeting of the two. It also signals a move in favour of consumer protection, since it seeks to broaden the circumstances in which consumers will own goods they have paid for, but not yet received. Since these rules will almost always function in insolvency situations, this broadening will be to the detriment of typical creditors.
Any practical tips?
Given the ongoing pressure the pandemic is bringing to the retail industry, retailers should already be clear on when ownership of goods passes to consumers. The new proposals under the Bill are a further incentive to do so. Understanding the point at which the contract is formed is key. Watch this space carefully to see how the consultation will affect the draft Bill.